MNI INTERVIEW: Bond Sell-Off Makes EU Fiscal Deal Crucial-Buti

A deteriorating geopolitical situation and bond-market sell-off make a rapid deal on new European fiscal rules imperative, the architect of European Commission proposals for a new fiscal regime Marco Buti told MNI, adding that he was confident of agreement by the end of the year.

While EU finance ministers will meet on Oct 17 to try and reach a deal on the basis of a new proposal from Spain, which holds the bloc’s rotating presidency, talks remain deadlocked between Germany’s demand for a minimum pace of debt reduction by countries exceeding fiscal limits and a push by southern states for exemptions for spending including green investments. (See MNI:Fresh Italian Demands Make EU Fiscal Deal Harder-Officials)

But Buti, who as head of the economic policy directorate oversaw European Commission proposals for reforms to fiscal strictures contained in the Stability and Growth Pact, said the bloc needs to provide clarity in uncertain times.

“The world is burning, and we can’t continue scrapping on issues that are certainly important but not of a vital nature, especially if a compromise is at hand,” he said in an interview as markets digested the weekend attack on Israel by Hamas.

“Hopefully, there will be a clear awareness of getting our act together on the various open fronts including first and foremost an agreement on fiscal rules, which is imperative now,” he said.

MANIFESTO FOR EUROPE

Buti was one of a group of leading economists and policymakers which has issued a “Manifesto for Europe” supporting the longer-term case for joint-financed European infrastructure projects and a central fiscal capacity.

A fiscal deal based on what is already on the table is a precondition for the Manifesto’s vision of a Europe that can become a significant geopolitical player, he said, adding that a deal was likely soon.

“I think in November this is something we can converge on.”

Member states’ differing demands are already largely covered by the Commission’s reform proposals, he said, noting that it includes safeguards for debt reduction and would allow extended debt-reduction deadlines for countries undertaking reform and investment.

“In the case of good reforms and good investments one gets a more gradual debt reduction – the essence of the Commission proposal implies you can’t superimpose on that a golden rule because the logic aims to end that type of objective by a more gradual pace of debt reduction,” Buti said. “You can play around with the definition of exceptional expenditure in the government balance but whatever treatment you decide on only ends up in the debt definition anyway.”

RULES HAVE TO BE REALISTIC

But, referring to Germany’s call for a minimum pace of debt reduction, he stressed that the existing rules have been proven to be so severe as to be unforceable.

“Even if one identifies some minimum benchmark, it will have to be realistic to be feasible,” he said. “One will have to have a definition which applies over the cycle or by a certain year in the future so as to allow some smoothing so as not to end up with a very pro-cyclical rule which is self-defeating and therefore very, very difficult to enforce.”

The Commission’s proposals remain at the core of current talks and should not be diluted even if individual member states are able to achieve some of their own preferences, he said. (See MNI: Italy Makes EU Fiscal Rules Push As Deficit Nerves Grow)

“Every country has put forward some requests and politically what happens is that they will push to find something in the final agreement with which they can go back to their capitals and citizens and say, ‘look what I won on this point’.”

However Buti counselled against any extension of the so-called “Escape Clause” which has suspended Stability and Growth Pact rules in the wake of Covid and Russia’s invasion of Ukraine but will expire at the end of this year barring some fresh economic catastrophe. The Pact’s return is likely to mean Italy and France face procedures for exceeding the maximum permitted fiscal deficits of 3% of GDP.

“In the current circumstances of market fragility, I think it would be a problem postponing this discussion,” Buti said.